AOL (NYSE:AOL) is set to release its Q3 2013 earnings Tuesday, November 5. During Q3, AOL test launched its Gathr subscription service which bundles digital entertainment and online security offerings for its subscribers. [1] Additionally, AOL acquired adapt.TV to bolster its programmatic video ads platform. We expect the company to report growth in revenues from the ads platform in this earnings announcement. [2] We will watch for improvements in AOL’s display ads business, which makes up around 50% of its total value. We will specifically look at metrics like unique visitors and page views per visitor across AOL and third-party properties as well as monitor the results of its search ads division, which has posted decent growth in the past few quarters. Moreover, we are looking for updates on cost-cutting measures undertaken by AOL to rein in cost at its hyperlocal news project Patch.com

According to our estimates, the display ads division together with display ads revenues on third-party websites constitute approximately 50% of AOL’s value. The key drivers for this division are unique visitor count, revenue per page view (RPM) and page view per unique visitor. The company has adopted a two prong strategy to boost revenues from this division. In order to increase user engagement and count, the company tied up with premium content providers to improve its content library. AOL also continues to develop original video content for its properties. We believe that improved content will drive the monthly unique visitor count at AOL, and thus help the company in attracting more advertisers to its properties.

The company continues to develop its real time bidding (RTB) programmatic platform to improve the monetization rate of content. eMarketer expects that RTB will account for more than 29% of all digital display spending by 2017. [3] We think AOL is well positioned to capture a bigger chunk of RTB spending in the future by leveraging its demand side platform (DSP) and supply side platform (SSP). In this earnings announcement, we are looking for more information on AOL’s programmatic buying platform, especially growth in adapt.TV, as this can drive revenue and help AOL maintain its competitive advantage over companies such as Yahoo and Google.

Search Ad Revenues In Focus

According to our estimates, the search ads division constitutes ~19% of AOL’s value. While this division posted five quarters of continuous growth in revenues, we believe AOL still has room for improvement. Although, AOL has managed to improve its click-through rates and RPS through its marketing efforts in the first half of 2013, its market share declined to 1.3% in the U.S. [4] However, search across AOL properties is powered by Google, which has recently launched the enhanced campaigns successfully. We believe that this newly launched product will increase the number of searches performed across AOL properties from smart mobile devices. Additionally, AOL’s push for content will also drive the search volume at AOL websites. We, therefore, expect that revenues for AOL’s search ads division to increase in the future.

Updates On Patch.com Restructuring

AOL has invested heavily in its hyperlocal news project Patch.com, but so far it has failed to turn a profit or meet its revenue goals. Despite Patch redesigns earlier this year, the website has not gained enough traction. Although, Patch had grown to about 900 sites and over 1,200 employees during the past three years, AOL has recently laid off close to 550 Patch employees and exited 400 of the non-viable patch sites. [5] We estimate that AOL can save $25 million in employee cost due to this restructuring. This leads us to believe that Patch can break-even by the end of 2013, if it can generate $40 million in revenues. We will continue to closely watch Patch’s progress in this earnings announcement, so as to ascertain the financial health of AOL’s business.

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